Tourism Multipliers501: Tourism Business

Multiplier theory emerges from the work of Kahn and Keynes

Multipliers are a means of estimating how much extra income is produced in an economy as a result of initial spending or injection of cash.

Every time money changes hand, it provides new income and continuous series of conversions of money spent by tourists from what economists term “Multiplier Effect”

The more often a conversion occurs, the greater its beneficial effect on the economy of the recipient country.

Multipliers or Ripple Effect

Direct: In the case of tourism, this expenditure is made by the tourist, government or similar agencies involved in tourism, providing goods and services, tourism generated exports or for tourism related investment in an area.

Indirect: Covers successive rounds of inter-business transactions resulting from direct expenditure.

Induced: This is the increased consumer spending resulting from the additional personal income generated by direct expenditure

(Indirect + Induced = Secondary Expenditure)

Types of Expenditure

The money generated by tourist spending multiplies as it passes through various sections of the economy. It can be explained as follows◦ From an initial impulse such as investment and

expenditure, there occurs one or more primary effects such as income and expenditure.

◦ These primary effects in the course of a 2nd period, produce secondary effects of the same type as the first.

◦ The process is repeated several times in the course of time.

◦ The multiplier makes it possible to calculate the sum of various primary, secondary and tertiary effects of the same type, which is then applied to the primary effect in order to arrive at the total effect.

For example, the money paid by the tourist in paying his hotel bill will be used by the management to provide for the costs which it had incurred in meeting the demands of the visitors such as food, drink, furnishing, laundry, electricity, entertainment etc.

The recipients in turn use the money to meet their financial commitments.

In other words, the tourist expenditure not only supports the tourist directly but helps indirectly to support many other businesses.

In this way, money may be said to be used several times and to spread into various sectors of the economy.

In sum, the money paid by the tourist may be used several times and after a long series of transfers over a given period of time, passes through all sectors of the national economy, stimulating each in turn throughout the process

The transfer of money however, is not absolute as there are leakages. Any leakage of this kind will reduce the stream of expenditure, which in consequence will limit and reduce the multiplier effect.

Leakages will be less in countries with advanced economies, and countries less in need of foreign imports, hence they are said to have more advanced economies.

The developing countries should strictly control imported items to get maximum benefits. The benefits otherwise accruing from tourism would be reduced or even cancelled by leakages.

Leakages

1) Remittance of income outside the host area, for example foreign workers.

2) Indirect and direct taxation, where the tax proceeds are not re-spent in the host area.

3) Savings out of the income received by the workers in the host area.

Other leakages include:

Sales (Transaction) Multiplier –this measures the extra business turnover created (direct and secondary) by an extra unit of tourist expenditure.

Output Multiplier –this is similar to the Sales Multiplier but it also takes into account inventory changes, such as the increase in stock levels by hotels, restaurants and shops because of increased trading activity.

It should be noted that few researchers specify whether or not inventory changes have been taken into account.

Types of Multipliers – Sales & Output

Income Multiplier- this measures the income generated by an extra unit of tourist expenditure. Confusion arises over the definition of income. Many researchers define income as disposable income accruing to households within the area, which is available for them to spend.

Although salaries paid to overseas residents are often excluded, a proportion of these salaries may be spent in the local area and should therefore be included. In considering national economies some studies include revenue accruing to the government in income.

Income multipliers can be expressed in one of two ways: the ratio method, which expresses the direct and indirect incomes (or the direct and secondary incomes) generated per unit of direct income; or the normal method, which expresses total income (direct and secondary)generated in the study area per unit increase.

Ratio multipliers indicate the internal linkages which exist between various sectors of the economy, but do not relate income generated to extra sales. Hence, on their own, ratio multipliers are valueless as a planning tool.

Types of Multipliers - Income

Employment Multiplier – this can be expressed in one of two ways: as a ration of the combination of direct and secondary employment generated per additional unit of tourist expenditure to direct employment generated, or as the employment created by tourism per unit of tourist expenditure

Types of Multipliers - Employment

Base Model – this is very simplistic and rarely used in practical research. It assumes that one can divide the economy under research into export activities and local (non-export) activities, and that a stable relationship exists between the export and local sectors, with these sectors linked by linear relationships. It further assumes that unemployed resources are available within the economy, and that the scale of the export activities is the sole determinant of the level of income and employment within the area.

Keynesian Model –this is based on identifying streams of income and employment which are generated in “rounds”, which diminish in geometric progression because of leakages at each round.

Input-Output Model – the input-output concept analyses the economy into its sectors and expresses a relationship of these sectors in matrix form, based on the results of research into the effects of tourist expenditure.

Multiplier Models

Multiplier Model